'Bankrupt' Western Governments Need 'Ruthanasia'

Western governments are bankrupt and central banks' quantitative easing policies will only make matters worse, Ruth Richardson, the former New Zealand Finance Minister whose anti-welfare message and austerity cuts were dubbed "Ruthanasia," warned in a CNBC interview.

During the interview, Richardson was challenged on this view by London & Capital’s chief investment officer Ashok Shah. "The risk is precisely the opposite, I think the role of the government is going to expand in the near future as it will be the one to provide capital to banks," Shah said.

But Richardson, who described her own 1990 reforms "the mother of all budgets," said governments should stop wasting money and concentrate on structural reforms.

"The British government is bankrupt. I ask, where's the capital going to come from? All the Western economy governments are in a bankrupt state," she said.

Nobel Prize winning economist Joseph Stiglitz said European governments got it wrong because their austerity measures will only extend the global economic downturn.

But Richardson dismissed the view that cutting government spending will hit growth.

"I don't think this is just a cyclical problem, this is a structural problem and you don't fix it by throwing more money at it," she said. "The government doesn't need to spend at the level it does, it needs to look at the quality of that spending."

Confidence in Private Sector

Central banks' printing money will only make the crisis worse, Richardson warned.

"The very last the financial system wants is more of the same. That only compounds the error," she said. "The government must put its own house in order, that means that if you take welfare for example, instead of giving everybody who doesn't need it a check, you target it, you reserve it for those who truly need it most."

"The government should be the port of last call, not a universal entitlement for everybody, so it's a matter of using scarce resources in the most fair and equitable way," Richardson added.

Governments need to change the way they do business and put confidence in the private sector, the former finance minister said.

"The new normal will be the government to be very, very discreet about the function it undertakes, to have more confidence in the private sector and individuals to give us the dynamic," Richardson said.

Central banks' liquidity response has been "played out to excess" and governments who poured money into banks and became shareholders now need to get out, because "governments are not good owners of those assets, they do not know about risk management," she said.

After the New Zealand Earthquake

The cost of a recent devastating earthquake in New Zealand looks set to top $2.7 billion. Ruth Richardson, former finance minister of New Zealand, spoke to CNBC about the aftermath of the quake.

"It's a moral hazard, the more a government is in there, the less the bank, the management, the board feel they're responsible for decision-making," she added.

A staged exit of the government from ownership of the banking sector "is crucial to rehabilitating the banks themselves," according to Richardson.